With tax season behind me, I’ve had some time to review my finances from a tax perspective. I made a few mistakes this year that I need to correct immediately in order to ensure that I have a smoother 2013.
Mistake #1 – I did not review my withholdings in September. I hear about people who are very excited in April to get their “tax bonus” and can’t help but scratch my head. Unless you are receiving earned income credit, you should be disappointed in your tax planning because you left money on deposit with the government. You did not earn a return on that money. I’m fine paying what is lawfully required (by fine I mean I will pay it because it is my legal obligation), but I don’t want to have a large deposit on hand with the government and lose out on earning interest. My goal each year is to owe a small amount to the government at tax time because this means that I have withheld the right amount on my W-2. My second goal is to avoid underpayment penalties. It’s a fine line but easily achieved with a little bit of foresight and planning. My mistake this year was to assume that I had already withheld enough to cover my liability. In fact, I was well short and had to adjust my finances at the beginning of the year to cover the shortfall. Fortunately, I was not subject to penalties.
What I should have done is first ensure that I was covered by safe harbor rules and then run an estimate of my current year tax liability. If you make under $150,000 you fall under the safe harbor rule as long as you paid at least your prior year liability. So if I owed $6,000 in tax in 2011, I would not be subject to penalties as long as I paid at least $6,000 during 2012. For you filthy rich people making more than the princely sum of $150,000 per year you need to pay in at least 110% of last year’s liability, meaning that you need to pay $6,600 in our example.
To run an estimate of my current year liability I like to use Intuit’s TaxCaster. It runs a quick calculation. To figure out how much I will owe for the year I enter in my salary, dependents, and deductions, but leave the withholdings blank. This will tell you how much you’ll owe for the year. Compare that to what’s been pulled out of your paycheck for the year and you’ll know if you’ve over- or under-estimated your withholdings. Huge Disclaimer: I am not advocating that you lie on your W-4. You should fill it out accurately and completely. As the IRS website says,
After you have given your employer a Form W-4, you can check to see whether the amount of tax withheld from your pay is too little or too much. If too much or too little tax is being withheld, you should give your employer a new Form W-4 to change your withholding. You should try to have your withholding match your actual tax liability. If not enough tax is withheld, you will owe tax at the end of the year and may have to pay interest and a penalty. If too much tax is withheld, you will lose the use of that money until you get your refund. Always check your withholding if there are personal or financial changes in your life or changes in the law that might change your tax liability.
Mistake #2 – Tracking and Documenting Charitable Miles – I help out a bit with a church youth group and took those kids on a few trips. They were probably three or four trips that totaled around 100 to 200 miles. Unfortunately, I didn’t write down the trips when I took them and didn’t track the miles. It was a small bit of savings lost. The key here is documentation. For charitable miles, the IRS tells us to keep reliable, written records. What is considered a reliable, written record? Depends on the facts and circumstances but Publication 526 says, “For example, your records might show the name of the organization you were serving and the dates you used your car for a charitable purpose.”
What I should have done: Just kept a log of my trips. This year I’m documenting my trips with a map and sticking the miles driven along with the date and purpose for the trip into Evernote.
Mistake #3 – Business Expenses – If you haven’t figured it out, I really need to work on my documentation. I didn’t miss out on too many. Again it was primarily miles driven and phone expenses for which I simply did not track until it was too late.
What I should have done is simple. Nothing major is required, but standard business practices need to include reconciling accounts and documenting expenditures in clear and concise way. It’s a tough lesson to learn because I missed out on a few deductions.
This year I’m also considering whether or not to take a home office deduction. The two major hurdles. First, I need to have part of the home regularly and exclusively used for business. Second, it needs to be my principle place of business. Right now, I’m good on the second but not so good about the first. Mostly because the space that I need is fairly small so I haven’t roped off an exclusive area so to speak. The good news is that for 2013, there is a simplified method for computing the home office deduction that could reduce some of the administrative burden normally associated with carving out a portion of your home costs. Could make life easier.
My mantra for 2013 is documentation, documentation, documentation. Track costs like a fitness freak tracks steps. Cash transactions and miles driven are the tricky ones. Everything else I’m tracking through Personal Capital or my bank accounts. The to tax planning is to start early and have a plan of action. Check your progress in June, September, and December so that you are not stuck with any surprises in April.